Tiered Intermediation in Equity-holding Networks

Abstract

Using Chinese business registry data, we construct a comprehensive firm-to-firm equity-

holding network and demonstrate its role as a tiered financial intermediary. The network ex-

clusively channels credit supply shocks from corporate shareholders to their subsidiaries, with

no significant propagation between subsidiaries or in the reverse direction. We find that a

10% increase in local bank credit growth at corporate shareholders’ locations increases sub-

sidiary investment by 0.6% of tangible fixed asset value, accounting for 42.5% of the median

investment rate. This tiered intermediation is particularly pronounced when shareholders are

non-state-owned enterprises (Non-SOEs) or controlling shareholders, and when subsidiaries

face greater financial constraints, less access to external financing, or exhibit high investment

opportunities. Equity transfers emerge as a key transmission channel, supported by robust

empirical evidence. Furthermore, to shed broader insights, we develop a general equilibrium

model incorporating an equity network, heterogeneous investment opportunities, and financial

constraints, showing that tiered intermediation arises as an equilibrium outcome.

Keywords: Tiered Intermediation, Business Groups, Equity Investment, Investment, Bank Credit Shock

JEL Classification: G23, G32